Meridian IPO needs to be 'clean' to fly | Meridian facts and figures

Meridian facts and figures – 2012 annual report

Net profit after tax: $74.6 million, -75.4%
Underlying NPAT: $106.1 million, -52%
Energy sales: $1.156 billion, +12%
EBITDAF: $476.6 million, -28%
Generation production: 9790 GWh, -19%
Retail customers: 287,304, +5%
Total assets: $8.7 billion, +2.75%
Total borrowings: $1.826 billion, +16%
Dividends paid: $140.7 million, -79.4%

Financial measures
Return on average equity: 1.5%, 2011: 6.1%
Net debt/net debt plus equity: 25%, 2011 19.3%
EBITDAF interest cover: 4.6, 2011 5.9

Recent events affecting performance: Low hydrological inflows (20% reduction in energy margin); sale of Tekapo and B hydro power stations (gain of $157.4 million); settlement of dispute with New Zealand Aluminium Smelter ($28.1 million net of legal costs before tax); impairments ($60.1 million) from sale of subsidiaries and development rationalisation; Project Hayes wind farm in Otago and the Mokihinui hydro project discontinued.

Outlook message: Uncertain macro-economic outlook; flat demand in New Zealand electricity market; focus on costs and efficiencies.

Meridian needs to solve its Tiwai Point headache before the IPO, a fund manager says.

The government confirmed on Thursday the state-owned power generator and retailer will be the next on the block for partial privatisation, after last week's float of Mighty River Power.

Mint Asset Management portfolio manager Shane Solly says it will be a better prospect for investors if the Tiwai issue – Meridian's contract with the country's biggest electricity customer, the Rio Tinto-controlled aluminium smelter – is wrapped up.

"I would like to hope that there'd be some conclusion prior to Meridian coming to the market.

"It would be sufficient to influence the way people want to get involved with the business."

Mr Solly says at a time when operating, cyclical companies are cutting their earnings guidance, certainty around Meridian's numbers will be important.

"While it's important to the government to get the IPO done, it's more important as an investor to make sure that it looks clean; as clean as possible."

He says Mark Binns is a "pretty capable" ceo but it's too early to say if Meridian will be a "ripper" before the company lays out its operational and financial details.

"Is there demand for it? Yeah, I think there is, but it has to be at the right price."

Woodward Partners senior equity analyst Nick Lewis says Meridian's IPO should be reasonably straight forward, with the market dictating if the capital raising of between $2.5 billion and $2.6 billion will be done through partially-paid shares or two tranches.

Mr Lewis is more concerned about possible interference by opposition political parties than Tiwai Point.

"Overall, the combination of the country and overseas investors will take the $2.5 billion – there's no problem."

Meridian's generation mix, with more than 60% hydro and a specialty in wind power, will appeal to overseas institutions looking for green investments, he says.

Tidying up
In 2011 and 2012, Meridian recognised impairments of $157.4 million in investments and advances to subsidiaries Whisper Tech, MEL Solar Holdings (the investment entity for Meridian Energy USA Ltd), Arc Innovations and Right House, as it tidied up its books ahead of the IPO.

Meridian sold Whisper Tech to its Spanish joint venture partner Mondragon in June 2012.

Whisper Tech owned 40% of joint venture company Efficient Home Energy, which made combined heat and power boilers for European customers.

Meridian Energy USA is a San Francisco-based solar power generation company which developed a 5MW solar photovolatiac power station at Mendota, California.

Arc Innovations is its stand-alone metering subsidiary.

Right House, Meridian's energy efficiency and home insulation company, was sold to Mark Group in July 2011.

Mr Lewis says this tidying up ahead of the float was because government-owned entities can pursue social projects but public companies will have a much tighter focus on financial returns.

"Unless these projects were going to earn a return then it was appropriate for them to no longer be part of the mix.

"They did the right thing - they got out of the businesses that were non-performing.

"Arguably they did the right thing by getting into them in the first place, by testing out new ideas.

"As with any new investment in any start-ups, some work and some don't."

With AGL Energy, Meridian is developing the largest wind farm in the southern hemisphere.

The $A1 billion, 140-turbine Macarthur wind farm in Victoria, Australia, 245km west of Melbourne.

The company's 2012 annual report says the 420-megawatt (MW) wind farm is expected to deliver $A58 million of annualised profit, before interest and tax, from January 2013.

Work has also started on the 131MW Mt Mercer wind farm, in western Victoria.

Meanwhile Meridian's specialist power retailer Powershop has been so successful in New Zealand it is considering establishing a similar company in Australia.

"Meridian is an expert in wind – they can claim that core competency," Mr Lewis says.

"Australia is quite similar to us, especially Victoria, in terms of its level of deregulation.

"And they've done a very good job of finding off-takers for the power, so they've hedged away the risk in most cases – unlike some of the wind farms here, where they were naked to the wholesale market price, in those cases they were hedged through long-term power purchase agreements with off-takers."

Jewel in the energy crown
Devon Funds Management analyst Phillip Anderson says he's "quite warm" on Meridian because an Electricity Authority review of transmission pricing review is likely to fall in its favour.

"Meridian could see quite a material drop in what it pays."

He says Meridian's hydro power stations, including Lakes Pukaki and Tekapo, are strategically the country's most important, which might be attractive to investors.

On the Tiwai Point question, he says Rio Tinto is unlikely to leave.

"The analysis I've seen on where it sits in the global cost curve for smelters it that it is moderately competitive and there's a lot of other smelters located in expensive countries, like Australia, which will probably shut before this."

Another concern the government might have as Meridian is floated is the Mighty River Power share price (NZX: MRP).

Since the float, MRP has hovered just above the $2.50 offer price and some investors might judge Meridian's yield prospects on how MRP is tracking.

Mr Solly says he is not concerned.

"When Telecom first listed it was at $1.60 and within a month or two it was at $1.40. And then within a year it was $1.80, three years later it was at $2.20.

"These businesses take time for people to understand and get comfortable with."

dwilliams@nbr.co.nz